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July
27
2017

Ruminations on Gold
Soren K. Group

Bitter Gold Traders

But Enda's enthusiasm is genuine. And that pisses us off. As veterans  of so many failed  formations in Gold we are a bit cynical. Maybe it is us. Perhaps it is we that are the problem. To be a Gold bull over the last 20 years is to be demoralized constantly. Not unlike living with a narcissist idiot  or a Jehovah witness that won't take an aspirin. They cannot  get it but we keep thinking they will someday and we stick around, hoping for Gold's enemies to take that aspirin. But it never comes. It never  will.

We are the idiots for believing someday that Gold's price will reflect its true value. The idiots that control Gold's price will never let  it reflect its true value. And that is because they aren't idiots. Just an unholy alliance of globalist academics, coin operated politicians, and financial hucksters looking to make a commission. Gold is just too hard to brand for them to make a profit. And so, we are the idiots. I can live with that. 

As to the title's second half: I began "trading" commodity futures in 1987 as an intern  on a Lehman Brother's retail equity desk. I've been witness to every commodity scandal from the Sumitomo Copper play, to the MG Oil trade, to the Ashanti 1999 Gold squeeze, various Oil and NG plays and everything in between having anything to do with Energy or Metals. And let's not forget Tyson Foods' payoff to Hillary Clinton with the "Winners to HRC / Losers to Tyson" account split. My firm at the time handled some of that flow. And  the "I"  pronoun is a composite  of 4 people contributing to this missive to stop trading metals.

Price is Not  Value

Price is the boat in the water. Value is the anchor dropped and sitting on the ocean floor. The  rope between anchor and boat are its volatility. The waves are price moving events. Gold is not volatile, its rope is not long from boat to anchor. But Gold is in a tiny, private ocean where some spoiled kid can make waves any time he wants to and push the price as far away as he can from the value. All he has to do is tell a producer client to sell, or turn on his stop-fishing algorithm - Fay Dress 

The Cross of Gold

Some examples Gold investors have had to battle over the last 50 years include:  

• Blatant Manipulation -  Not just down, but up as well. Manipulation destroys a market's integrity and thus causes all but the deepest pocketed and  the  most connected to play.  You'd have to be an idiot (or a nethical person who can resist temptation) to NOT manipulate  a market that can be cornered  with $1Trillion when  your bank already manipulates LiBoR and Bonds.
  
  
• Market Structure - disincentivizes long ownership via collateral requirements, and other things like asymmetric access and information in a globally traded product.
  
  
• Contract Size - The contract itself is too big for participation by the regular public. It should be traded in grams, not 1000's of ounces. This causes longs to be overly leveraged as specs and makes true investors unable to afford delivery. Remember how long it took to get Stocks/ Bonds to eliminate fractional prices? That was to protect their franchises via keeping  tick increments large. Contract size does  the same thing
  
  
• Old Boys Network- the concentration of power is in too few hands. Producers who are represented (and fleeced) by their  bankers, accounting rules, rehypothecation for example
  
  
• Stupid Money - Funds used to trading FX and bond markets are poorly educated on the propensity of Gold's liquidity gaps on exit time. Thus they create the volatility that kills themselves by trying to use stop losses on huge unfillable positions. Druckenmiller and Soros make money in Gold by happily giving up 1% on exit trades, and they are the smart ones. Its not always a spoof 
  
  
• Western "Investment" Philosophy-  we are trained to chase rising asset prices because of disingenuous marketers. We are now collectively Giffen good longs who buy on fear of "missing out"
  
  
• Retail as Exit Strategy - the use of retail investors to offload positions via "buy recommendations" using so called research as marketing materials.
  
  
• Government  Backstop -  at the extreme;  government intervention to stop Buffet taking delivery of Silver in 1997, the Hunt brothers being forced to liquidate by COMEX members and producers (the shorts) who asked for Gov't intervention. The deal that Greenspan  cut with Rubin to loan US Gold for GS carry trades in 1993-ish 
  
  
• Press  Bashing - Find me an article where  Gold  is in the headline in a positive way by the mainstream press. And make sure it doesn't have the word BUT after the compliment.
  
  
• The Inherent Conflict of Interest in Broker- Dealers - Metals players can  act as Principal, Agency, recommender, and more without being in violation of any Regulatory laws. That is a license to steal

Maybe it is us, but why do we keep insisting Gold is a store of value when so many aspects of the market are stacked against it? Why do we even look at the daily prices? That only makes us vulnerable to salesmen saying: "Buy GLD on CNBC"

The Late Bill Hicks makes our point about Marketers for us

Gold Has intrinsic Value, But Value and Price are not  the Same thing

We know Gold is the best, truest store of value on earth when it is in our hands because it does not rust, it is inert, it cannot be synthesized, and because of its malleability and ductile characteristics as well as its conductivity, if it were to ever be cheaper than copper, it would be completely consumed for those  characteristics.

We also know Gold futures and GLD are the worst trading vehicle on earth for us because of its liquidity gaps, homogeneous players, contract size, and susceptibility to manipulation. We  trade  it going in withoureyes open. You should  not trade it at all. Stop trading Gold. Buy a Gold mine instead if you believe the price will go up. 

To paraphrase Peter  Lynch:

Price is the boat in the water. Value is the anchor dropped and sitting on the ocean floor. The  rope between anchor and boat are its volatility. The waves  are events. Gold is not volatile, its  rope is not longfrom boat to anchor. But Gold  is in a tiny, private ocean where some  kid can make waves any time he wants to  push the price as far away as he can from the value

Idiots Rule

Gold fund traders, with few exceptions are the sheeple; that keep getting fleeced. And in the process they run over the public's feeble attempts to protect its own wealth. 

Why does anyone trade Gold from the long side if they've no intention or resources to take delivery? What is the point of marketing an asset that is supposed to be bought on dips as a store of wealth and thus a hedge for fiat debasement, as something that should instead be chased in rallies?

Brokers do not have investors, they have traders. As a  one time student of Graham & Dodd's Securities Analysis, and a  protege of a CFA who drilled me on value versus price, I find it stupid to tell someone to INVEST in something because it has gone up. To buy it because  "The train is leaving the station" . These are not investment recommendations. 

When you buy a stock with a PE of 20, you are buying a company that is expected to take 20 years to make  back the money you invested. That is an important corollary of understanding PE. Investment means buying with money you do not need for a long period of time. Anything less than a 5 year time horizon is not an investment in a business, it is a speculation on a stock. Gold is a hedge for all  your investment risk and should be held indefinitely

Gold is money. Silver is Not

It may not be government accepted currency, but it is money. And it is the last thing left competing with paper money on earth. That is incentive enough to do everything in a governments  power to dissuade investment in it.

Cryptos are NOT MONEY. They are a currency and well suited as a transfer of wealth from one medium to another.  But they are not money yet. And wont be accepted as money until  governments and Banks  can co-opt their use for  "our benefit and protection".

Silver is not money for the same  reason  Gold  is money. Silver is  used industrially, is "consumed", and its supply is more readily grown if needed. Gold is not consumed or destroyed

Gold will continue to be money until one of 2 things happens

1. An industrial use is found for it which will make it consumed, destroyed or irrecoverable. This will  drive up the price and make it no longer a stable reflection of buying power
   
   
2. Gold is Synthesized - in  which  case its value is related to the cost of making it.

That is a paraphrase of Peter Bernstein's great book A Primer on Money, Banking, and Gold 

BlockChain is Key to complete Monetization

The question is,  if Gold  is money, and the world will not allow it to be currency, what happens to it? This is where the blockchain phenomenon comes in. Imagine instant delivery of quantities less than 100 ounces? Imagine  the cost savings dealer    would enjoy and thus be able to sell gold in small increments like  coins or grams with instant payment and delivery verification? Imagine banks without credit departments and offices  that play the float on your money.

Gold may never  be a government approved currency again. But it will continue to be money, and technologies like blockchain will make it more valuable as the pipeline between buyer and seller are made more secure.

In the meantime, stop trading Gold. Own it and keep the percentage you have as part of your portfolio stable  whether that be 1, 5 of 10% .Stop playing the paper trading game. Think like China, buy to store wealth, not create it. Buy dips, not rallies.

But if you trade it as we do, keep your eyes open to the forces that influence it. 

 Fuck the price. Focus on the value. Use price to buy undervalued and sell overvalued. Keep its weighting constant in your overall portfolio. But stop trading it because some salesman told you to. 

 

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